Apple, Netflix And Streaming Media

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Over the last five years, it has appeared as if Apple Inc. (NASDAQ: AAPL) need only dip its toe into a market to control it. Seemingly overnight, the once quirky, cultish computer manufacturer, formerly patronized primarily by artists and sophisticated designers, became the darling of Wall Street and one of the highest valued companies in the world. In this golden era of Apple products, there have been almost no discernable hiccups in its steady march towards technological dominance.

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Netflix
Netflix

Apple Participate

Sure, Apple has been taken to task for labor issues in its manufacturing plants in China (a lesson learned by Nike some years back) and overheating problems within the latest generation of iPads, but its products have still managed to capture the hearts (and pocketbooks) of a global audience. Throughout this enviable success, however, one aspect of their business has lagged and the competition appears more poised than ever to leave the Cupertino company behind. Streaming content, a market that Apple participates in through its iTunes store and looks to expand through its Apple TV, is seeing monumental gains with companies not named Apple.

Delivery of content via a set top box, or simply STB, is not a new technology. Radio and broadcast television were early forms of content delivery, but usually required optimal conditions and placement to capture the “on-air” signals sent by towers. The introduction of cable television in the 40s and 50s —an attempt by broadcasters to reach rural audiences who could not pick up airwave signals and were thus required to be connected (or “hardwired”) via cables —marked the genesis of true content delivery such as television programs. It was soon apparent that cable, which could deliver broadcasts over larger distances than traditional broadcasting, offered end-users more programming choices. The proliferation of cable from the late 60s through the 80s emphasized this feature, creating megacorporations from startups like ESPN, MTV and the grandfather of home movie delivery, HBO.

Netflix

With the dawn of rapid communication via the internet, the landscape for content delivery has changed rapidly, as have the players. Netflix (NASDAQ: NFLX) is one of the firms that was able to carve out a respectable niche in streaming content, particularly films. The company revolutionized (and some say killed) the traditional video rental model at the dawn of the millennium by adopting a flat-fee, subscription based service that allowed consumers to pay one fee per month for as many movies as they wanted. There were no late fees (a bane to those of us who remember the old way of renting movies) and customers were not restricted to a set number of rentals, provided previous selections were returned. The start-up was an instant triumph and launched a successful IPO in 2002, this after the dotcom bubble had burst and Wall Street considered internet based new-comers persona non grata. With the explosion in broadband over the ensuing decade, Netflix was able to migrate a large portion of its business to the delivery of digital content, or streaming.

Netflix Picking Up Apple Drop

Among the many competitors that Apple is currently facing, one of the more daunting is Netflix. Apple s foray into streaming media has been inconsistent; with profits seen in content delivery through iTunes but consumer resistance to it s other on-demand digital offerings like Apple TV. According to IHS Screen Digest, Apple was the overwhelming leader in online delivery of movies in 2009, commanding a 71.5% share of that market (compared to Netflix s less than 1%). However, by 2011, Apple s share dropped sharply to 32.3%, with Netflix picking up the slack for a 44% market share. In addition, digital delivery offered by Amazon (NASDAQ: AMZN), Google (NASDAQ: GOOG) and Hulu (ownership shared by U.S. network giants NBC, FOX and ABC) have dissolved Apple s once tight grip on serving content.

Should Apple be worried? Many analysts feel that Apple has not been proactive enough to protect its presence in an increasingly important market. Streaming video will eventually replace the need for DVDs, and experts think that consumers will drift towards the alternatives to current subscription-based cable set-ups, opting for more of an a-la-carte style of choosing content. With Netflix announcing that it had streamed a record one billion hours this June, effectively making it the single largest cable television network in the world, the importance of digital content and delivery will probably be a recurring theme in the halls of Apple Headquarters.

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